What You Need To Know About Spend-Based Loyalty Programs

How the shift from mileage-based to spend-based programs affects you

Traditionally, airlines have rewarded their customers through loyalty programs that awarded points or miles based on the distance traveled during a flight. But more and more airlines are shifting towards spend-based programs that allow members to accumulate rewards and earn status through the amount of money spent on the ticket as opposed to the distance flown. Here’s what you need to know about this shift towards spend-based loyalty.

The evolution of spend-based loyalty

To understand why more companies are going spend-based, let’s look into why retailers and airlines have rewards programs in the first place. Repeat customers are a valuable asset to any business, and by offering discounts or free goods and services, customers are encouraged to remain faithful to one retailer or company.

But when it comes to airlines, not all customers are created equal. Flier A that pays $4,000 for one first-class flight from New York City to San Francisco spends the same amount as Flier B that buys 10 $400 economy flights on the same route. But between baggage handling, customer service time and in-flight services, Flier A is definitely more profitable to the airline. Yet, under a mileage-based rewards scheme, Flier A and Flier B are earning the same number of miles per ticket. To retain more profitable customers like Flier A, it makes sense for airlines to reward them differently.

The solution is spend-based loyalty programs.

How am I affected by spend-based loyalty?

Under spend-based loyalty programs, airlines are rewarding their highest-spending customers. Travelers who spend more, earn more. If a customer is paying more for fewer flights, they will work their way up the airline’s rewards tiers faster, reaching elite status sooner to earn perks like lounge access, early boarding or additional checked baggage allowances. Elite customers will also earn more points when purchasing the same value of fares as an unaffiliated or non-elite flier.

The move to spend-based loyalty benefits schedule-pressed business travelers with deep enough pockets to buy expensive last-minute flights. These types of flyers will earn miles much quicker than in the traditional mileage-based setup. But spend-based programs make it more difficult for those that purchase deeply-discounted sale fares to earn rewards.

From Southwest to Starbucks

A good way to understand how the move from mileage-based to spend-based loyalty works is by comparing it to a company that’s received considerable press coverage for their loyalty program shift – Starbucks. In February 2016, the world’s most popular coffee chain announced that it was changing its transaction-based rewards program to a spend-based one. Previously, each transaction earned one star, regardless of the beverage size or price. So that meant my morning Venti Vanilla Latte earned me the same reward – one star – as the customer before me that spent half as much as I did on his Tall Blonde Roast.

Yet, once we each accumulated 12 stars, we were both eligible for a free Venti Vanilla Latte, even if those 12 stars were earned through purchasing 12 small, cheap coffees.

Under the new spend-based program, customers earn two stars for every dollar spent. While it’ll take both of us 125 stars to get a free reward, I’ll be able to achieve that reward sooner with my Venti Vanilla Lattes, compared to Mr. Tall Blonde Roast.

Making spend-based loyalty work for you

The move to spend-based loyalty programs has already occurred for most European and U.S. airlines. Delta and United switched over in late 2015 and American Airlines updated their loyalty program to reward flights based on ticket price back in August.

This shift has upset the portion of fliers that are losing out. These are customers that accumulate their points and miles by booking discounted flights, or choosing cheaper multi-stop routes over pricier direct flights. It’s true that overall, customers will be earning slightly fewer miles under spend-based loyalty programs. But the system rewards each airline’s best customers – premium class and last-minute business travelers.

Customers also benefit with more award seats being made available – a common frustration for any traveler flying on points. Since January 2015, Delta has made 50 percent more award tickets available. They’ve also added more awards that can be redeemed at lower mileage levels.

While the shift is making a few loyal customers unhappy, it can be a beneficial scenario if you know the right way to take advantage of it.